How spoliation standards affect corporations filing sanctions

In the wake of Judge Shira Scheindlin’s 2010 landmark decision in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, defining the extent of the duty to preserve potentially relevant electronically stored information (ESI) for e-discovery has been a hot issue for the courts.

In Pension Committee, Judge Scheindlin, of the Federal District Court for the Southern District of New York, found that the plaintiffs’ failure to implement a legal hold on their ESI constituted gross negligence. The judge ordered further discovery,monetary sanctions and an adverse inference instruction to the jury.

However, not all motions for sanctions alleging the opposing party deleted ESI while under a duty to preserve it—a practice known as spoliation—are successful. Two recent cases provide guidance on how and how not to file motions for spoliation sanctions, and a third case clarifies how to file a preservation order requiring the opposing party to preserve ESI.

The cases also highlight the fact-specific nature of many e-discovery decisions.

“Cookie-cutter rules do not exist for addressing e-discovery issues,” says K&L Gates Partner Thomas Smith. “Courts are loathe to state that a party must take certain specified e-discovery steps in every single circumstance.”

That means inside counsel must make judgment calls when dealing with litigation hold issues, Magistrate Judge James Francis of the Southern District of New York told this year’s InsideCounsel SuperConference attendees.

“Right now there’s nothing you can do other than make your best guess about what a court is going to think about how well you preserved when it comes to the end of the day and somebody else has made a sanctions motion against you,” Judge Francis said.

Ticking Clock

In Am. Nat’l Prop. & Cas. Co. v. Campbell Ins., a July decision in the Middle District of Tennessee, the plaintiff filed a motion for spoliation more than a year after the close of discovery, just a few weeks before the start of trial and more than 14 months after discovering some emails with “damning” evidence had been destroyed. The court denied the motion as untimely.

“To succeed on a spoliation claim, one must take action as soon as one discovers that there may be spoliation occurring,” says Smith, whose firm hosts an Internet database of e-discovery cases.

Jason Bonk, a member of the Weil, Gotshal & Manges E-Discovery Task Force, says if necessary, parties should raise e-discovery issues through a court conference, before filing motions.

Relevant Standard

In Steuben Foods, Inc. v. Country Gourmet Foods, a federal judge in the Western District of New York ruled in April that speculation without proof that relevant emails were deleted is not sufficient grounds for sanctions. The defendant argued that the plaintiff’s failure to issue a written litigation hold and produce at least three emails created a presumption that spoliation has occurred. The court reviewed the emails and held that regardless of whether they were lost due to oversight or through negligence, the emails likely were not relevant.

According to the decision, a party bringing a spoliation motion must demonstrate that the party charged with destroying the evidence had an obligation to preserve it; the records were destroyed with a “culpable state of mind;” and the destroyed evidence was relevant to the case. “The defendant in Steuben Foods simply did not have sufficiently compelling facts to justify sanctions,” says Jennifer Young, a partner at Milberg.

Steuben Foods is somewhat distinguished from Pension Committee, adds Bonk, in holding that a failure to issue a written legal hold notice when litigation has commenced or is reasonably foreseeable does not establish gross negligence, resulting in the imposition of sanctions.

“While it clearly is good practice to issue litigation hold notices in writing, the court in Steuben Foods reasoned that the plaintiff’s decision to issue the hold notice only orally was not sanctionable,” Smith adds. “It is evident from the opinion that the court did not find Steuben Foods to have acted in bad faith in any respect, or the result may have been different.”

Pre-Emptive Move

A third case, Haraburda v. Arcelor Mittal USA, decided in June in the Federal District Court for the Northern District of Indiana, demonstrates how a party can obtain an order requiring the opposing party to retain evidence before the fact, rather than trying to prove spoliation later.

After filing an employment discrimination complaint, the plaintiff inquired about emails she claimed were deleted without her consent during an Equal Employment Opportunity Commission investigation. The defendant responded that “files stored on company computers are company property and can be assessed and/or deleted as the company views appropriate.”

The plaintiff’s attorneys moved for an order to preserve evidence. The court granted the motion while reiterating that a duty to preserve arises when “[a party] knows, or should have known, that litigation was imminent.”

The court stated relevant factors to be considered in granting a preservation order, including whether the plaintiff could demonstrate that, absent an order, necessary evidence would be destroyed and the plaintiff would suffer irreparable harm, and the burden the order would impose on the parties.

“Haraburda is a primer on how not to respond to an inquiry about preservation,” says Young. “If you cannot reassure the court that [you are] taking affirmative steps to preserve relevant documents after the duty to preserve has clearly been triggered, any reasonable motion brought by your opponent to require preservation or address the effects of your failure to preserve stands a good chance of succeeding.”

Taken together, these three cases emphasize that a motion for sanctions or a preservation order is more likely to be successful “when you are confident that evidence really has been lost, or is at very real risk of being lost,” says Smith. “Then, if you cannot reach an agreement with the other party as to a remedy, you file your motion promptly.”

Sidebar: Preservation Penalty

Failure to preserve ESI when litigation is imminent can result in very costly penalties, particularly if the court has other issues with your case.

In Eon-Net v. Flagstar Bancorp, the Federal Circuit affirmed in July a district court decision that assessed almost a half million dollars against a patent licensing and litigation firm and its attorneys for litigation misconduct, including failure to preserve documents.

After discovery closed in some patent infringement cases it had filed, Eon- Net destroyed all inventor and nonpublic prosecution records. The company then instituted a data retention policy, which resulted in the company keeping no records, despite the fact it had other infringement actions pending.

However, spoliation was only part of the basis for high sanctions: The district court characterized the cases as “baseless” and said they were filed “in bad faith” in order to obtain quick settlements.